In a national study by economists the conclusion was reached that the recent mortgage crisis was partially a result of the changes in the federal bankruptcy laws, made effective in October 2005. To those of us practicing personal bankruptcy law in Massachusetts, this seems like a simplified conclusion based on assumptions.
The economists, Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle J. White of the University of California at San Diego and Ning Zhu of the Graduate School of Management at the University of California, Davis, use statistics to conclude that because the cost of filing bankruptcy went up “more than 50 %”, that is from $200 to $300, fewer consumers could file for bankruptcy protection resulting in more folks being unable to discharge credit card debt – therefore being unable to pay their mortgages. In antidotal evidence obtained by practicing bankruptcy there is in fact no evidence that consumer could not pay the additional $100 to file personal bankruptcy.
The economists, suggest that “the reform increased the severity of the crisis when it came” however, their evidence is merely based on the rise in prime and subprime mortgage default rates rising in the years following the Bankruptcy Reform Act of 2005.
In fact, most of our clients that defaulted on their homes seemed to be hit with huge jumps in mortgage interest rates. In addition, folks that lost jobs and had high mortgage rates were adversely affected. Finally, many of our clients with two and three family houses lost tenants or rental income due to the downturn in the economy. These days, many of our clients are hit with jacked up credit card interest rates that push them over the fence into needing bankruptcy protection.